In 2012, so far, the Dow Jones is up 6%, S&P 500 is up 8%, what about the Nasdaq? The technology based index is up a whopping 13%. The Nasdaq is less than hundred points away from 3,000, a mark not seen since November 17, 2000.
The three biggest contributors to this rise are Apple, Microsoft and Cisco. Apple, the heaviest weighted tech in the Nasdaq, recently announced a very good quarter and saw its share price climb above $500 for the first time. Microsoft’s share price has rallied a surprising 21% and Cisco’s surprisingly good quarterly results have pushed shares up 12%.
“You got to be in it”; “Fear of missing a rally is overwhelming. Some of the big tech names are probably due for a rest, but the question is when are they due for a rest.” says David Rolfe, chief investment officer of Wedgewood Partners.
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In the Nasdaq, the top ten stocks take up about 35% of the weight in the index. Those ten companies are Apple, Microsoft, Google, Oracle, Intel, Cisco, Qualcomm, Amazon, Amgen and Comcast.
It is expected that once the index hits 3,000, the index will have a pullback to take gains and make the 3,000 mark more justifiable. Right now traders are piling into tech stocks with valuations at a high. This is some risky business because at some point there will be a sell off. The Nasdaq is up 30% since October. You can not go much longer with those kinds of gains without a pullback. I think investors should be wary of investing with these tech stocks right now. However, we do not know when the pullback will be so if you want to play a potential rally, I would suggest that you back up your purchases with protective puts (buying put options against your holdings), this will protect you from any potential downside risk.
It is simply too hard to tell when an index will pullback. When will hit the point that is too much to go on? No one knows, including smart money. If you are a follower of smart money I would be wary of following them into the Nasdaq because if there is a sell off tomorrow, you just got hosed. Conversely, if the Nasdaq rallies you could be sitting on some nice gains. Buy tech on a pullback if you want to play it safe.